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Buying a house will be one of the most important financial decisions you will make in your life and knowing well in advance how much money it will take to buy the right house; it will make this process much easier.
Next, not only I will cover your down payment options but also the typical closing costs you will find on your closing disclosure, the property taxes, the approximate homeowner’s insurance premiums which will all determine how much money you will need to buy a house. We will also briefly explain the mortgage insurance differences for each program which will not affect necessarily your cash to close but will affect your monthly payment and this could have an influence on how much down payment you should give to keep your payment as budgeted.
What is the minimum amount of money I need to buy a house?
The answer will depend to a large degree on the price of the desired home, area where you buy affecting the taxes and the cost of the homeowner’s insurance and the mortgage program you decide to select. Conversely during your search for the right lender, you may find multiple mortgage loan programs with different names but in essence there are only the following 4 major mortgage loan options with its minimum required down payments:
- Conventional Loan: For higher credit scores you can buy with only 3% down but generally buyers prefer to give 5% down payment to avoid paying higher mortgage insurance premiums which I will explain later.
- Federal Housing Administration Loan (FHA): This is the so-called First-Time Home Buyer Program in which you can buy a house with only 3.5% down payment.
- The U.S. Department of Agriculture Loan (USDA): This is the so-called rural loan for low to moderate income earners which allows you to close with 0% down payment.
- The US Department of Veteran Affairs Loan (VA): This loan is reserved only for active and veteran service personnel and their surviving spouses. This loan also allows you to close with 0% down payment.
So now we know unless we are active in the US Army or honorably discharged, we only have 3 options; a conventional loan typically 5% down, an FHA loan with 3.5% down or a USDA loan with 0% or no down payment if we decide to buy in rural areas. The vast majority of purchases, however, come down to either Conventional at 5% or FHA with 3.5% down payment. This means provided we found a house selling for $300,000, our down payment would be 5% or $15,000 for conventional and $10,500 for an FHA loan.
Why do buyers prefer to give 5% on a conventional loan if for borrowers with higher credit scores you can go as low as 3%?
Because the cost of the monthly mortgage insurance premium. Whenever buyers borrow more than the 80% of the purchase price of the house, the loan investor insuring your mortgage requires the borrower to pay mortgage insurance in case of defaulting paying the loan. Purchasing a house with less than 20% down payment carries a risk which you and I as consumers must insure to ensure access to financing. So, lets imagine we found the perfect house selling for $300,000 and our middle credit score is 680. The cost of our mortgage insurance premium with 3% down would be $232.80/month. Notwithstanding with same scenario if we were to give 5% down payment our mortgage insurance premium would be $178.13/month. That is $54.67 less a month or $656.04/year for not giving an additional $6,000 at closing. Now you understand why buyers prefer 5% as opposed to 3%.
So, for the purpose of this article, we will continue our scenario with a purchase of $300,000 with 5% down payment or $15,000 on conventional, 3.5% or $10,500 on FHA and 0% down or $0.00 for a USDA or rural loan.
What are the closing costs I will have to pay at closing?
The following is a list of closing costs, description and its $ amount following our $300,000 scenario you will find in your closing disclosure. Some of these fees such as title lender and owner insurance premiums are regulated by the state of Texas. The rest probably maybe slightly differ from lender to lender although in recent times the differences are minimal.
Discount Points – The cost of locking your interest rate expressed as % of loan amount. Each day market may change and so pricing needs to be requested. Typical fee is 1% of the loan amount.
Underwriting Fee – The cost to analyze and approve your loan ranging from $800 to $1200
Appraisal Fee – The cost to assess the market value ranging from $600 to $900
Credit Report Fee – The cost of obtaining the report with Experian, Equifax and TransUnion data.
Attorney Document Preparation Fee – The cost to prepare final documents to sign.
Flood Determination Fee – Each house must have this report to confirm to the bank whether house is in a flood zone or not. If in a flood zone, then must have flood insurance.
Mortgage Insurance – This fee varies from program to program, but the good news is that is not paid out of the pocket but financed instead. Fee varies from 1% to 3.6% of the loan amount.
Processing Fee – This fee is charged by the professional coordinating all parts and making the closing successful. This fee typically is $500.
Tax Service Fee – Report costing $65 to $85 which Title Company orders to ensure seller property taxes are up to date.
Title Lender Title Insurance – Protects the lender against a legal claim against the home’s title This fee is state regulated and following our scenario fee could be around $1,800.
Title Owner’s Title Insurance - Protects you against losses from previous owners’ problems that originated before closing the purchase and were unknown before then. The fee is around $100.
Title Recording Services - Recording a deed informs the public that a transaction, or some other change, has taken place. This fee is based on # of pages but typically is $85 to $150.
Title Settlement/Closing Fee - Settlement or closing is the act to legally complete the execution of a contract between a buyer and a seller. This fee typically varies from $350 to $450.
Title Tax Certificate Fee - A report detailing the individual taxing authorities for a property providing the assessed value, taxes imposed, any tax liens and/or any exemptions currently applied to the property. This report costs around $75.
Homeowner’s Insurance Premium – This is the cost to protect your house from any damages due to storms, plumbing damages, roof and similar. Cost is associated with the size and value of the property. For our scenario it could be anywhere from $1,400 to $2,150 a year.
Homeowner’s Insurance & Property Taxes Reserves – Whenever a buyer finances over 80% loan to value, the bank requires 3 months of insurance and taxes reserves. For our case coulsd be around $2000 to $3000.
HOA Transfer Fee – The transfer of owner and contact info at the home owners association and typically is $250.
How will Property Taxes and Homeowner’s Insurance impact Total Cost of Buying a House.
The location of your house will impact the amount of money needed at closing as well as the monthly payment so it would be wise to obtain enough information before you commit to a certain area without having real numbers. Buying a house close to the sea line will require more coverages such as windstorm coverage increasing by $100 to $150/month the cost of the policy and $1,200 to $1,800 at closing. Conversely if your $300,000 house is for instance one of “the affordable” homes in the subdivision probably you will have much higher taxes than if you buy a $300,000 house being one of the most expensive ones in the area. The cost of the Property Taxes has a direct correlation with the values of the homes surrounding your house. A $300,000 house in Houston could have taxes of anywhere between $4,500 to $9,000. That is from $375 to $750. So, a house surrounded of expensive homes and near the sea line could have a monthly expense between taxes and insurance of $900/month and a house more inland surrounded of same or cheaper homes could have payments of $$475/month. That is a net difference of $425/month for taxes and insurance alone and $1,875 more at closing, an amount worth making some homework before making quick decisions.
It is estimated the cost to foreclose a home due to default payment is 20% of the property value. Therefore, whenever a buyer finances a home over 80% loan to value, Mortgage insurance is needed to lower the risk to the lender making the loan. All government backed loans, however, require mortgage insurance regardless the percentage financed.
Following the example used in previous explanations of a house purchase for $300,000 and a credit of 760+ scores for either one or two borrowers, we would have the following mortgage insurance for conventional loans:
- 5% down payment with one borrower the cost would be 0.31% or $73.63/month.
- 5% down payment with two borrowers (same credit score) would cost 0.22% or $52.25/month.
- 10% down payment with one borrower the cost would be 0.24% or $57.00.
- 10% down payment with two borrowers (same credit score) would cost 0.17% or $40.38/month.
On the First Time Home Buyer loan program or FHA, mortgage insurance is charged with a one time financed upfront amount and a monthly rate of the loan balance. The 30 year loan following same scenario of $300,000 with 3.5% down payment would be as follows:
- A 1.75% or $5,066.25 as the upfront amount financed and 0.85% or $205.06 as the monthly rate.
For the USDA or rural loan mortgage insurance is called upfront guarantee fee and it is similar to FHA but because USDA is a loan primarily for low to moderate income borrowers, the rates are lower. Following same scenario of $300,000 with 0% down payment rates would be as follows:
- A one-time 1% or $3,000 upfront guarantee fee and a 0.35% or $87.50/month rate.
Finally for VA or Veteran Affair loans for active or honorably discharged army personnel rates are higher for the upfront and zero for the monthly rate. The VA fee is called Funding Fee. Following the same scenario of $300,000 for a first-time veteran purchase the rate would be:
- A onetime upfront funding fee of 2.3% or $6,900 financed into the loan.
- A fee of 1.65% or $4,950 if borrower gives 5% down payment.
- A fee of 1.4% or $4,200 if borrower gives 10% down payment.
Veterans who have a % of disability will be exempt from paying this fee.
So, you're ready to buy a house and your first question is how much do I need to buy a house? The answer may vary but based on the scenario discussed of a purchase of $300,000, we have recent closings where buyers went to closing receiving a refund to paying around $25,000 for down payment and closing costs. For VA loans we had closings where buyer had a refund as high as $1500 to cash to close needing $5,000. For FHA loans we had purchases of $300,000 with cash to close under $14,000 and Conventional Loans with 5% down payment and total cash to close of $25,000. Do you want a detailed custom estimate?
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